forensic investigations of financial statement fraud: pbs ... · pbs&j – a case study...

Copyright © 2008 Bill Pruitt and Mitchell E. Herr All Rights Reserved

Forensic Investigations of Financial Statement Fraud:

PBS&J – A Case StudySeptember 26, 2008

Forensic Investigations of Financial Statement Fraud:

PBS&J – A Case StudySeptember 26, 2008

Bill Pruitt Mitchell E. Herr, PartnerDirector, PBSJ Holland & Knight LLP

Presentation to

2

About PBS&JAbout PBS&J

• Founded 1960 in Miami, Florida

• Multi-disciplined

• 4,000 employees; 75 offices

• Employee owned; SEC registered

• A history of success

3

Employee Growth (2000-2006)Employee Growth (2000-2006)

20002000

40004000

35003500

30003000

25002500

2000200020012001 20022002 20032003 20042004 20052005 20062006

4

Path to DiscoveryPath to Discovery

• 2000: SEC registrant

• 2002: Sarbanes-Oxley

• 2003: Audit Committee formed

– Three outside members

• 2004: Internal Auditor hired

5

Audit Committee FunctionAudit Committee Function

• Hire independent auditors

• Review financial statements

• Determine executive compensation

• Monitor internal controls and disclosure

– Internal Audits

6

Path to DiscoveryPath to Discovery

• February 2005: Discrepancy found in 10Q

– Immediately contacted Audit Committee

– Challenged Corporate Finance

• Board authorized Audit Committee investigation

– Hired attorneys, forensic auditors

• Discovered embezzlement; confronted CFO

7

A Breach of TrustA Breach of Trust

• A fraud that began 13 years prior

• Collusion by trusted employees in corporate finance and treasury:

– Chief Financial Officer

– Manager of Business Systems

– Accounting Manager

8

What They DidWhat They Did

• Secret accounts

• Cash accounts

• Medical reserves

• Income taxes

• Changing methods to avoid detection

• Altogether, $36 million was stolen

9

By Early 2006By Early 2006

• Were wrapping up the investigation

• Had a finalized overhead rate for engineering company

• Began overhead audit of PBS&J Construction Services

10

The Forensic InvestigationThe Forensic Investigation

•From CPA’s perspective

11

An Independent, Thorough InvestigationAn Independent, Thorough Investigation

• Audit Committee authority for thorough investigation

• H&K retained:

– CPA firm to identify thefts and adjusting entries

– CPA firm to handle electronic data issues

– CPA firm with expertise in gov’t contracting

– A private investigative firm

12

An Independent Thorough InvestigationAn Independent Thorough Investigation

• Accountants had to:

– Understand they reported to H&K

– Work as one harmonious team

13

Self-Reporting and CooperationSelf-Reporting and Cooperation

• Self-reported to:

– Local AUSA in Miami

– DOJ in Washington

– SEC’s Enforcement Division in Miami

– AGs offices in multiple states

– Gov’t customers in several states

14

Self-Reporting and CooperationSelf-Reporting and Cooperation

• Accountants had to:

– Carefully document investigative steps

– Realize all communications were subject to scrutiny

– Make interim progress reports to prosecutors

15

A Large Investigation Under Time PressureA Large Investigation Under Time Pressure

• Investigation spanned 13 years and more than 15 million entries

– Reviewed nearly 13 million pages

– Reviewed electronic general ledger and supporting documents

– Reviewed 1.5 million messages

– Analyzed 76 hard drives and reviewed intact and deleted files

– Interviewed 80 employees, some more than once

– Interviewed 31 non-employees

16

• Accounting professionals:

– Under time pressure – PBS&J barred from new gov’t work

– Had to use work product from other firms

– Participated in critical witness interviews

A Large Investigation Under Time PressureA Large Investigation Under Time Pressure

17

Three Phases of InvestigationThree Phases of Investigation

1. Who embezzled?Additional controls?

2. Amount embezzled?How was it concealed?Impact on financials?Other employees at fault?Overhead adjustments responsible persons?

3. Asset recovery!

18

Embezzlement MethodsEmbezzlement Methods

• Funds embezzled in various ways:

– Manual duplicates of uncashed checks

– PBS&J checks deposited to personal account

– PBS&J funds used to pay credit cards

– Fraudulent checks not entered in system

– Perpetrators destroyed fraudulent checks

• Compared payees on cancelled checks to system

• Had to request cancelled checks from banks

19

Embezzlement MethodsEmbezzlement Methods

• Perpetrators circumvented Positive Pay:

– Secretly failed to close old account without Positive Pay

– Diverted funds from account without Positive Pay

• Secret accounts: thefts looked like inter-co transfers

• Only one fraudulent wire transfer

20

Concealment MethodsConcealment Methods

• Hundreds of concealing entries

– Difficult to distinguish ordinary entries

• 7 concealment methods:

1. Recorded different payee than on check

2. Showed legitimate purpose on fraudulent check

3. Altered balances in general ledger in next fiscal year

4. Altered journal entries after posting

5. Recorded fraudulent journal entries to reduce cash

6. Transferred cash between accounts, but not record receipt

7. Prepared fraudulent bank reconciliations

21

Convincing all Interested Constituencies Convincing all Interested Constituencies

• Mission: convince that restatements were correct

– Two national accounting firms –current and prior auditors

– DOJ and state AG offices

– SEC

– Federal and state gov’t clients

22

Convincing all Interested Constituencies Convincing all Interested Constituencies

• PBS&J risked loss of gov’t contracts

• Laid out investigative plan

• Solicited input

• Defended our approaches

• Result: all constituencies concluded:

– Investigation was thorough

– Restatements were accurate

23

Identifying Remedial Measures Identifying Remedial Measures

• CPAs assisted in identifying remedial measures

• PBS&J adoption of remedial measures was key to success

24

So, You Want to be a Forensic Accountant? So, You Want to be a Forensic Accountant?

• You’ll like being a forensic accountant if you enjoy:

– Taking direction from lawyers

– Teaming with your competitors

– Working under time and emotional pressure

– Prying information out of crooks

– Explaining yourself to government prosecutors

– Defending your actions to skeptical fellow forensic accountants

– Saving a good company with honest, hard-working employees

25

Where We Are TodayWhere We Are Today

• Restated financials

• Settled with DOJ

• SEC did not sue PBS&J

• Wrapping up client refunds

• Doing business with gov’t clients

• Back to business—better and stronger!

• Sharing our story

26

What about the employees who stole from our company?

27

SentencesSentences

• Scott DeLoach ($17 million): 97 months

• Maria Garcia: ($10 million): 63 months (under appeal)

• Rose Licata: ($9 million): 63 months

28

A Stronger Company TodayA Stronger Company Today

• CFO with SEC/Sarbox experience

– A new Finance Department

• Independent Board members

• A robust Ethics and Compliance Program

– Code of Conduct

– Employee Training

– Hotline

– Melissa Eubanks Award

29

A Stronger Company TodayA Stronger Company Today

• Strengthened Internal Audit Program

• Comprehensive Business Risk Assessment Program

• Centralized finance/contracts functions

• New cost accounting system being implemented

30

Rules to Live ByRules to Live By

• Find your mistakes, admit to them, then fix them—immediately!

• Transparency is a must!

• You don’t know what you don’t know!

• Reagan had it right: Trust, but verify

• Create a dedicated crisis management strategy

31

Rules to Live ByRules to Live By

• Communicate, communicate, communicate

– No news means bad news during a crisis

– Anticipation kills!

• And most importantly…

32

Do the right thing…Do the right thing…

even when no one is looking.